Environmental Product Differentiation
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In order to succeed in deriving competitive advantage from environmental
concern, firms need to create value and then capture it from customers, suppliers,
or other economic agents. Their ability to do so depends on the structure
of their industry, the government regulatory framework, and their executives
own creativity in defining the nature of competition in their businesses. These
are exactly the factors that influence corporate success more generally, suggesting
that we can make significant progress in addressing environmental problems
if we analyze them as we would other business issues.
Pollution and environmental degradation are examples of externalities;
that is, their effects are not reflected in market prices. Economic logic suggests
that in the absence of regulation companies will not take into account the costs
their pollution imposes on society (in the form of increased illness, damage to plant and animal life, and so on). In the simplest case, if the presence of environmental
externalities were the only departure from the assumptions of perfect
competition, then any firm that tried to provide or preserve more environmental
quality than is required by law would lose all of its customers. However, the
world does not deliver market failures one at a time: environmental externalities
coexist with market power, incomplete information, and the other departures
from the competitive paradigm that make business administration interesting.
Further, government intervention in markets, whether motivated by a desire to
offset one or more of these market failures or by some other purpose, itself creates
opportunities and problems for companies. Given the simultaneous existence
of more than one market failure and the presence of government, some
firms can respond to social pressure for improved environmental conditions
while simultaneously delivering increased value to shareholders. Because this
will be possible for some firms and not others, depending on the particular market
imperfections that each confronts, executives ought to think creatively and